Supreme Court Split on Pharma ‘Pay for Delay’ Deals

So-called "pay-for-delay" arrangements between generic and brand-name drug companies are not inherently legal, and each instance must be considered on a case-by-case basis, the Supreme Court ruled Monday.

In the 5-3 decision overruling the 11th Circuit Court of Appeals, Justice Stephen Breyer, writing for the majority, listed five reasons why the appellate court erred in giving blanket immunity to pay-for-delay agreements, in which brand-name drugmakers pay or compensate generic drug companies in exchange for a later entry date of the cheaper generic version of a drug:

"A reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects"

"One who makes such a payment may be unable to explain and to justify it"

"Such a firm or individual may well possess market power derived from the patent"

"A court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent"

"Parties may well find ways to settle patent disputes without the use of reverse payments"

"In our view, these considerations, taken together, outweigh the single strong consideration -- the desirability of settlements -- that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements," Breyer wrote.

Justice Samuel Alito recused himself from the vote.

The case, known as Federal Trade Commission vs. Actavis, involved Solvay Pharmaceuticals, which was granted a patent for AndroGel -- a topical testosterone medication for hypogonadism -- in 2003, 3 years after getting FDA approval for the drug. Later that year, generic drugmaker Actavis filed an Abbreviated New Drug Application for a generic version of the drug, as did Paddock Laboratories. Solvay then sued Activas and Paddock but settled with them in 2006 under a pay-for-delay agreement.

Under the settlement, Actavis agreed not to market its generic until the end of August, 2015, 65 months prior to the expiration of Solvay's patent. In return, Solvay agreed to pay Actavis $19-30 million a year for 9 years. Solvay made similar agreements with Paddock and with a third company, Par Pharmaceutical, which had joined forces with Paddock to litigate the patent claim.

The Federal Trade Commission (FTC) -- which claims that such pay-for-delay agreements cost American consumers $3.5 billion a year in the form of higher drug prices -- sued Solvay in 2009, claiming the settlement violated antitrust laws. The Eleventh Circuit rejected the FTC's arguments, ruling that as long as the settlement didn't extend beyond the patent expiration it was legal and not an antitrust violation.

"In our view ... reverse payment settlements such as the agreement alleged in the complaint before us can sometimes violate the antitrust laws," Breyer wrote for the court. "We consequently hold that the Eleventh Circuit should have allowed the FTC's lawsuit to proceed."

On the other hand, the justices said they refused to automatically designate all pay-for-delay settlements as illegal.

"The likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale ... and the lack of any other convincing justification," Breyer wrote. "The existence and degree of any anticompetitive consequence may also vary as among industries. These complexities lead us to conclude that the FTC must prove its case as in other rule-of-reason cases."

"The rationale behind a payment of this size cannot in every case be supported by traditional settlement considerations," he continued. "The payment may instead provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market."

In their dissent, Justices Antonin Scalia and Clarence Thomas, led by Chief Justice John Roberts, argued that patents represent exceptions to antitrust laws.

"The correct approach should therefore be to ask whether the settlement gives Solvay monopoly power beyond what the patent already gave it," Roberts wrote for the dissenting justices. "The Court, however, departs from this approach, and would instead use antitrust law's amorphous 'rule of reason' to inquire into the anticompetitive effects of such settlements. This novel approach is without support in any statute, and will discourage the settlement of patent litigation."

In carving out this new approach, "the majority today departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements," Roberts concluded. "I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law."

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